Just a few notes as I've done lot's of silicone in my new house...
Personally I prefer a bead of silicone inside as window frames contract and expand and plaster right up rarely lasts more than a few years without starting to look ragged.
There are two main types of silicone sealant, low and high modulus (i.e. modulus of elasticity), the stuff that gets used in bathrooms is normally high modulus and contains a type of acid that evaporates as it cures, this is why it stinks but also why it cures more quickly. The stuff you use on window frames is the low modulus stuff so it can a) bridge bigger gaps and b) allow for more movement, these tend to be "neutral cure" so take longer to cure but don't stink the house out. You tend to find house builders use the high mod stuff on the inside as its cheaper and it's what they have loads of, but then that's why it quickly peels away from the wall as the frame moves in the temperature changes. Only downside is the high mod "bathroom" stuff tends to dry to a brighter white finish but I prefer a neat/non peeling bead that is slightly duller personally...
I personally now use the Dow Corning "for upvc" stuff linked to earlier, I also use the "original" silicone smoothing tools, the "Fugi" kit, to be honest most of these tools are similar but the Fugi kit comes with lots of different profiles and are made of good sturdy solid silicone themselves. You can use whatever silicone you like though as long as it is low modulus neutral cure. Try and avoid non silicone based stuff though, some "frame sealers" are basically glorified caulk and won't last anywhere near as long.
My general technique for window frames is:
1) Remove any old sealant
2) Patch up with patching plaster/filler of your choice to the window frame edge but leaving a small gap if possible (1-2mm max)
3) Mask up window and frame to the size of silicone bead you want
4) Run the silicone into the gap, don't be stingy or try and make too small a bead
5) Smooth with the appropriate Fugi profiler
6) Remove tape
7) Using tiny amount of washing up liquid in cold water (not spit!!! It contains bacteria, you just need a surfactant to provide a barrier between your finger and the silicone and washing up liquid is much better) i wet my finger and smooth the edges left by the tape and any tooling lines with quick, decisive movements
8) Leave to dry for at least 24 hours
It's worked very well for me, I did some 2 years ago when I moved in and they all look good as when I did them. Of course, silicone can't be painted over so if that's your aim then you might need to consider other options.